untanglingwebs
El Supremo
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September 30, 2013 at 7:15 pm
Corruption alleged after Detroit pension deal
$200M loaned from 2006-09 tied to bribes, kickbacks, officials say
Robert Snell
The Detroit News
An indictment alleges Roy Dixon funded a lavish lifestyle, including an Atlanta house, with money from the Detroit pension funds.
An indictment alleges Roy Dixon funded a lavish lifestyle, including an Atlanta house, with money from the Detroit pension funds. (AP)
Detroit — A Wall Street deal backed by former Mayor Kwame Kilpatrick that helped push the city into bankruptcy bankrolled a three-year spree of alleged corruption, according to federal court records and pension officials.
The spending cheated Detroit retirees out of more than $84 million, led to criminal charges against six people and compounded the impact of a money-losing Wall Street deal, which could eventually cost the city more than $2.7 billion.
Federal prosecutors allege city pension officials started approving a series of shady transactions with businessmen in January 2006, six months after the Wall Street debt deal started injecting $1.44 billion into the Detroit pension funds.
Flush with cash, pension fund trustees loaned more than $200 million to businessmen accused of paying bribes and kickbacks between January 2006 and April 2009, according to federal prosecutors. The businessmen included a Georgia man charged with embezzling more than $3 million with the help of a former Detroit Lions wide receiver and spending some of the cash on an $8.5 million mansion in Atlanta.
Some of the money was squandered on riskier alternative investments, including real estate and private equity deals that were approved when Kilpatrick and his appointees — including a childhood friend and fraternity brother — held considerable influence over the pension funds.
“Once the deal went through, the dark side found out and that’s how all these (expletive) deals went through,” Detroit Police & Fire pension chairman George Orzech said.
The money-losing Wall Street deal has exposed the city’s pension funds to a possible takeover by Emergency Manager Kevyn Orr. He says the retirement system is significantly underfunded and wants to cut retiree pensions to help reduce the city’s overall $18 billion debt.
The timing of the Wall Street deal and almost immediate decision by pension officials to spend the money on allegedly corrupt investments did not surprise Orr spokesman Bill Nowling.
“This is a shocking coincidence,” Nowling said sarcastically. “I think every Detroit pensioner should be demanding from their union leadership and pension leadership, ‘Where is that money?’ ”
It’s gone, according to the U.S. Attorney’s Office, which contends the funds were wasted on deals pitched by businessmen accused of plying Kilpatrick and pension officials with private jet flights and trips to Bermuda, Las Vegas and the Turks and Caicos Islands, gift baskets stuffed with cash, casino chips and thousands in cash.
The businessmen, in turn, allegedly received millions in loans from the pension funds for ventures that included real estate, private equity and a used-car dealership.
Complicated transaction The alleged corruption flowed from a controversial deal in 2005 pushed by Kilpatrick. At the time, he wanted to borrow $1.44 billion to prop up the city’s pension funds.
City leaders financed the pension debt by swapping its variable interest rate for a fixed rate, effectively betting the variable interest rates would exceed the fixed rate of about 6 percent.
Just the opposite happened. Variable interest rates plummeted in 2008-09 and have remained low since, costing taxpayers tens of millions in additional borrowing costs, city financial records show.
Orr is trying to end the complicated transaction in a high-stakes fight in bankruptcy court. His financial consultants argue total payments related to the Wall Street deal, including interest, could cost Detroit taxpayers more than $2.7 billion by 2034.
Orzech said pension fund members were against the Wall Street deal in 2005 because of high fees and the complex nature of the transaction.
Robert Brooks, a professor of finance at the University of Alabama in Tuscaloosa, said the IOUs written for the pension funds likely “sped up” Detroit’s financial collapse.
“It’s incredibly arrogant to think I’m going to go borrow money, invest it in the stock market and then live off the earnings,” Brooks said.
The first infusion of cash flowed into the pension funds in June 2005. About $680 million went to the city’s Police & Fire pension fund, Orzech said. Approximately $740 million went to the General pension fund
.
“The vast majority went into the stock and bond market,” Orzech said.
He said a small percentage, about $27 million, went into alternative investments, a growing trend among public pension plans that includes money for real estate, hedge funds and private equity. Alternative investments carry greater risk and potential reward.
Roy Dixon, a Georgia investment adviser with ties to Detroit, wanted some of that money, prosecutors allege. He is charged in a federal indictment with paying a series of bribes to get the cash, including money for Kilpatrick and cash for the ex-mayor’s fraternity brother, former city Treasurer Jeffrey Beasley.
In 2006, months after the Detroit City Council approved Kilpatrick’s Wall Street deal, Dixon formed the private-equity firm Onyx Capital Advisers, which was based in Detroit.
Onyx wanted to act as a private equity firm and invest pension fund money in a real estate deal in the Turks and Caicos Islands and a Georgia company that sold automobiles to people with bad credit
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That company, Georgia-based Second Chance Motors, was owned by Mike Farr, the former Lions wideout (1990-92). His father is ex-Lion Mel Farr Sr., the “superstar” Detroit-area auto dealer who pitched cars in commercials while wearing a red cape and pretending to fly.
By June 2007, the Detroit pension funds and one in Pontiac agreed to invest $25 million in Onyx. That was exactly one year after Detroit received the final infusion from Kilpatrick’s Wall Street deal.
To secure the investment, prosecutors allege Dixon paid bribes and kickbacks to Kilpatrick, Beasley, three other pension trustees and others. Dixon and an unnamed business partner also allegedly contributed $45,000 to Kilpatrick’s nonprofit, the Kilpatrick Civic Fund.
Trial coming in MarchDixon, 50, was indicted in December and accused of embezzling more than $3 million. He will stand trial in March and faces up to 20 years in prison if convicted of charges including bribery and conspiracy to commit wire fraud.
Dixon’s defense lawyer Edward Wishnow did not respond to messages seeking comment.
In court documents, Dixon said Beasley and other pension officials extorted money and gifts from him.
The indictment and a probe by the U.S. Securities and Exchange Commission allege Dixon fueled a lavish lifestyle with money loaned on behalf of Detroit retirees.
In 2008, Dixon was building the stone mansion in Atlanta. The FBI and SEC analyzed bank and financial records and alleged that Dixon had Farr pay three construction companies $521,000 in pension fund cash, according to prosecutors.
Why were you doing that?” SEC lawyer Robert Moye asked Farr during a December 2011 deposition.
“Mr. Dixon asked me to do that,” Farr said. “It had something to do with his construction loan on — I don’t know if he didn’t have enough — there wasn’t enough money in the loan that he had to finish the home.”
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The sprawling Craftsman-style home is beyond an imposing gate on 2 1/2 acres in the wealthy Buckhead neighborhood north of Atlanta.
The mansion has seven bedrooms, 10 baths and features a three-car garage, a dining room that seats 12 people, pool, exercise room, library and four fireplaces.
Detroit Police & Fire pension trustee Mark Diaz said it is unfair that a businessman who allegedly embezzled money from retirees has a mansion at a time when Detroit pensioners fear they could end up losing their own homes if their pensions are slashed.
“Repulsive, if you want to put a word to it,” Diaz said.
The home is headed for foreclosure soon.
A sale is scheduled for November, according to a source familiar with the situation.
The pension fund bribery trial is supposed to start four months later, in March.
Deal 'enormously risky'The criminal case against Dixon, Beasley and two others alleges a cozy relationship between the Atlanta businessman and pension officials.
In December 2008, Dixon allegedly paid for a Police & Fire pension trustee, Paul Stewart, and his “paramour” to vacation in Naples, Fla., according to prosecutors. While there, Stewart allegedly attended a New Year’s Eve party at Dixon’s $2.7 million vacation home, which is for sale.
Diaz, the Police & Fire trustee, replaced Stewart in 2011. He suggests money from the $1.44 billion Wall Street deal arrived quickly and was spent quickly, sometimes against the advice of professional investment advisers.
“Unfortunately, it looks like their haste made waste,” Diaz said.
When Dixon was indicted last year, prosecutors said the Detroit pension funds had lost the entire $20 million investment in Onyx. Pontiac’s pension fund lost $3.8 million
.
The Dixon deal is one of several that lost money for the pension funds. In all, the pension funds lost at least $84.18 million on investments tied to the alleged fraud scheme involving Beasley and other pension officials, says the U.S. Attorney’s Office.
In July, the city filed the biggest municipal bankruptcy in U.S. history, which was prompted, in part, by the burden of paying retiree pensions and Kilpatrick’s Wall Street deal.
“It was not necessarily a bad deal, but it was enormously risky,” Nowling said. “The only entities doing these types of deals were ones that could pay the piper if they lost.”
Since being appointed in March, Orr has criticized the pension funds for putting retiree money in alternative investments and being involved in alleged corruption
.
“It’s frustrating,” Nowling added. “We always get made out to be the bad guys. I didn’t make these investments. Kevyn didn’t make these investments, (Mayor Dave) Bing didn’t make them. Nobody here did.”
'We trusted people'The pension funds have created an ethics policy in the wake of the indictments and either replaced or fired officials accused of wrongdoing, Diaz said. That includes the pension funds’ lawyer, Ronald Zajac, who is awaiting trial alongside Beasley, Stewart and Dixon.
“We trusted people managing our system back then to do the best job on our behalf,” Diaz said. “In spite of the economy taking a turn for the worse, in spite of the alleged corruption and bad deals, we are still at the top of the heap when it comes down to funding levels for pension systems.
“Where would we be had those things not happened?” Diaz wondered. “That’s what really kills me.”
Five of the eight Detroit Police & Fire pension fund trustees who voted to lend $10 million to Georgia businessman Roy Dixon have either been indicted, sent to prison or accused of taking cash or trips during a corruption scandal involving the pension funds. They include:
Marty Bandemer: A former Detroit Police union president allegedly received $5,000 in cash from pension fund businessmen during a 2007 birthday party at the Atheneum Suite Hotel, according to court records. Bandemer also allegedly received $15,000 in casino chips from a pension businessman and a free trip from another to the Bahamas in 2008. Bandemer has not been charged with a crime.
Jeffrey Beasley: A former city treasurer and fraternity brother of ex-Mayor Kwame Kilpatrick was charged with taking bribes and kickbacks in a federal indictment in February 2012.
DeDan Milton: This longtime friend and executive assistant to Kilpatrick admitted taking about $16,000 in kickbacks in connection with two city land sales. He was sentenced to three years and six months in prison and released last month.
Alberta Tinsley-Talabi: She took a Caribbean trip, campaign cash and a donation from Dixon while supporting his $10 million city pension fund deal, according to prosecutors. She was later elected to the state House of Representatives and has not been charged in the ongoing corruption case.
Paul Stewart: A former vice president of the Detroit Police Officers Association. He allegedly received a $5,000 casino chip bribe; a Christmas basket stuffed with cash; $2,500 during a trip to New York City and $2,500 during a trip to Florida; and trips to the Bahamas and Naples, Fla., with his mistress — all from people doing business with the pension fund, according to the indictment.
From The Detroit News: http://www.detroitnews.com/article/20130930/METRO01/309300024#ixzz2gVH1bzlH |
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